Legal Issues In Business Scenarios

Scenario 1: Limitation of Liability with Exclusion Clause at Auto Repair Shop

1). John always gets his car repaired at Mike’s Auto. He has been going there for 7 years and takes his car there for repairs and service about twice a year. As he enters the door of Mikes’there is a sign on the wall behind the counter that says, ‘All vehicles are accepted for repair subject to the terms and conditions appearing in our invoice’. The sign is on white paper (A4) with Black writing, next to it are numerous advertisements for products sold at Mike’s auto. John never read the sign, he always dropped off his car on his way to work and was in a hurry. When he returned to pick up his car the attendant would hand him an ‘invoice’ to sign. This had his name on it, the details of the car and the work done. The invoice stated:

1. The customer acknowledges that the agreed repair work has been satisfactorily performed.

2. Mike’s Auto regrets that no responsibility can be accepted for damage or loss caused to the customer’s cars by fire, theft or otherwise.

On the occasion in question John left his car for some repair work to be done and followed the usual routine set out above. When he returned to pick it up the next morning he signed the invoice as above and went out into the yard to collect his car. To his shock he found that the GPS navigation system fitted to the car was missing and the car clearly showed signs of beingin an accident.

The evidence shows that overnight thieves had broken into Mike’s Auto and stolen the GPS system from the car. John’s car was not locked, however, Mike’s Auto was locked and the alarm was on but the thieves managed to disarm the alarm system and get past the locks: it was alleged it was an inside job but this could not be proven. In addition, during the previous day the manager needed to go to a meeting. The car yard was full of cars that day that were in for repairs and he could not get his own car out without having to move many cars. John’s car was over near the curb so he decided to take it to get to his meeting. By this time the repair work had been done and the manager thought it would be good to see how it was running before John picked it up. He drove the car to his meeting and parked it outside the cafe where the meeting was being held. While at the meeting someone ran into the car causing damage to the rear of the car. They then drove off and were never

2). Peter, David, John and Lynette are directors (“Directors”) of a large public company, Australian Motor Corporation (“Company”).

The Company has a sophisticated financial and accounting system which includes assessment from both internal and external auditors.

In October 2013 the Directors passed a resolution to adopt the Company’s 2013 Financial Statements (“Financial Statements”) and to make the relevant declarations under section

295(4)(d) of the Corporations Act. The Directors passed the resolution without reading the Financial Statements in any detail but rather relied on the internal and external auditors’ advice

that the Financial Statements were true and correct. The Financial Statements incorrectly classified $900 million of current liabilities as “non current” liabilities. This had the effect of giving a false picture of the solvency of the Company. ASIC has now commenced proceedings against the Directors for a breach of section 180 of the Corporations Act.

3). Paul is the holder of the Governing Director’s share in a family manufacturing company which was incorporated in 2005 (“Company”). At the time of incorporation the other shareholders in the Company were Paul’s wife, Mavis who held three “B” class shares and Paul and Mavis’ sons, Peter, Clive and Don, who each held one “B” class share each in the Company. Peter, Clive and Don worked in the Company on a full time basis. Pursuant to the constitution of the Company Paul, as holder of the Governing Director’s share in the Company, had vested in him “all powers and authorities and discretion vested in the board of directors”. Paul, therefore, had complete control of the Company. Upon Paul’s death his Governing Director’s share would convert to a “B” class share. Pursuant to the constitution, whilst Paul remained the Governing Director, Mavis and Peter, Clive and Don as holders of “B” class shares had no voting rights. However the constitution provided that after the death of Paul the “B” class shares would carry voting rights.

Mavis died in 2012, leaving her three “B” shares in the Company to her three sons. Shortly thereafter Paul formed a friendship with Cleo. Eventually Paul and Cleo married and Cleo moved into the family home. Peter, Clive and Don did not get on with Cleo whom they regarded as an opportunist and this view was reinforced when Paul advised his sons that he proposed to issue a special category of shares to Cleo which would give her control over the Company upon Paul’s death. Cleo neither had experience nor qualifications in the manufacturing

industry.

In January 2014 Paul as Governing Director issued the special category of shares to Cleo giving her control of the Company upon his death. The effect of the issue of the special category of shares to Cleo therefore was to dilute the voting power of the “B” class shares

upon Paul’s death.

Issue:

In the given circumstances the issue that exists is whether Mike can limit and restrict his liability by relying on the exclusion clause printed on the invoice.

Law:

1). In this given scenario the principle of exclusion clause is relevant.  Exclusion clause can be defined as a term in the contract which aims to limit or restrict the liability of either of the parties to the contract. However an exclusion clause will be ineffective if reasonable notice of such term is not given by the party who wishes to rely on such clause as held in the case Olley v Marlborough Court [1949] 1 K.B. 532. In this case the claimant had booked a room in the hotel. The contract had been formed between the claimant and the hotel authority however the contract had no mention of any clause which could limit the liability of the hotel. However on the door of the hotel room there was notice which aimed to exclude the liability of the hotel authorities for any loss of property of the guest from the hotel room. The claimant’s fur coat had been stolen from the room. It was held by the court that reasonable notice of the exclusion had not been given to the claimant and that the term was not present in the original contract and the clause hab no validity. However in the case L'Estrange v Graucob [1934] 2 KB 394 it had been held by the court that in circumstances where written contract had been by the parties the exclusion clause would be binding upon the parties even if the party who signed the contractual document had not read the clause in the document. In this notable case the claimant had purchased a cigarette vending machine by signing an invoice which contained the clause that any express, implied condition, statement or warranty was excluded. The vending machine did not work and wanted to reject it under the Sale of Goods Act. It was held by the court that the claimant was bound by the terms of the contract.   

Application

By analyzing the facts of this case, it can be stated that John had given his car for repairing at Mike’s Auto. He had been a customer at Mike’s Auto for a long time. A sign had been put up on the wall of Mike’s Auto that all the vehicles would be subject to the terms of the invoice. Every time he came back to pick up his car from Mike’s Auto he used to sign an invoice which contained the exclusion clause that Mike’s Auto cannot be held liable for the damage sustained by any of customer’s cars which is caused by Fire or theft. He did the same on the occasion as mentioned in the case study. Thus by the application of the decision of the  L'Estrange v Graucob on the facts of the case study it can be stated that the exclusion clause would be effective in limiting the liability of Mike’s Auto as it had been present in the invoice which was signed by John even though he had not the terms.

Scenario 2: Potential Breach of Duties by Company Directors

Conclusion:

Thus to conclude, it can be stated that Mike would be protected by the exclusion printed on the invoice which had been signed by John.

 Issue:

In this given scenario the issue that is said to exist is whether the directors of the company had breached their duties when they incorrectly declared the financial statements of the company by relying on the expert advice of the auditors and whether they can take any defense under section 180(2) of the Corporations Act

Law:

2). The law related to governance of corporations and companies are governed by the Corporations Act 2001(Cth). It has been provided in section 180 of the Corporations Act that any director or officer of an organization has the responsibility to discharge their duties with due care and diligence. The actions of a director are analyzed from the perspective of a reasonable person acting as the director, in the similar circumstances as the director and having the similar powers. If it is established that a reasonable person acting in the given circumstances of a director, occupying the same powers of the directors and having the same responsibilities of the directors would have acted in a more diligent and careful manner, it would be considered that the directors breached their duty under section 180(1).  However as provided in subsection 180(2) of the Corporations Act, it can be stated that a director making a business decision would be held to be meeting the requirements of subsection 180(1) if:

such director makes the judgment for the business in good faith

such director does not have any personal interest involved while making the decision

such director makes enquiries and informs himself about the judgment to the extent that such director reasonably believes to be appropriate

Such director is of the belief that the judgment is in the best interest of the company.

Further it has been provided in section 189(a)(i) of the Corporations Act that if a director relies on the information provided by an employee of a corporation whom believes to be competent and reliable on reasonable grounds such reliance can be considered to be reasonable unless evidence points to the contrary. Further in subsection 189(a)(ii) it has been provided that the directors have the can rely on the expert advice if such director has reasonable grounds to believe that the professional expert or the advisor has acted within his profession or competence while providing the advice. Further it can be stated in accordance with section 189(b)(i) of the CA that the director must establish that the reliance was made in good faith for the reliance to be considered to be reasonable.

Application

Thus by analyzing the facts of the case it can be stated that, the directors disclosed the financial statements by relying on the expert advice of the internal auditors as well as the external auditors of the company. However the financial statements were later realized to be incorrect. Thus in this given scenario, it can be stated that the directors had reasonable grounds to rely on the information provided by the auditors as it was reasonable for them to believe that producing the fina statements was within the expertise and competency of the auditors. Therefore such reliance can be considered to be reasonable. Further in accordance with section 180(2) it can be stated that the directors acted in good faith, did not have any personal interests involved and believed such information to be true.

 Conclusion

Thus in conclusion it, can be stated that the directors will have defenses for breaching their directors’ duties as they relied on the expert advice of the auditors.

Issue:

In the given scenario the issue that can be identified is whether Peter, Clive and Don can sue Peter for breaching the his director’s duties as provided in section 181 of the Corporations Act.

Law:

3). It has been provided in section 181 of the Corporations Act that directors must act in the best interest of the corporations and such action should be fit for the purpose. Breaching this section imposes a civil penalty upon the directors as per the provisions of section 1317e of the Corporations Act. Thus, in relation to the provisions of this section it can be stated that Directors are obligated to act honestly and for the benefit of the shareholders. Further it can be said that a director must not exercise his power for his personal profit. If it is established that a director acted for personal profit or for the profit f third party such director would be held to have used their power for an improper purpose and subsequently breached his duty. Further it has been clearly provided in section 182(1) of the Corporations Act that a director or officer of the company must not use his power which has been derived by his position to gain an advantage for someone else or for himself and cause detriment to the company.

Application:

Thus by analyzing the facts of the case it can be stated that Paul after marrying Cleo issued a special category of shares to Cleo which would give her control over the affairs of the company after the death of Paul. It can be mentioned that the issue of special category of shares would dilute the voting rights of the holders of the “B” class shares who are in this scenario Peter Clive and Don. It can further be pointed out that Cleo had no prior experience neither qualifications of managing a manufacturing industry. Thus, in this case it is clearly evident that the act of issuing special class of shares to Cleo was a breach of the director’s duty as provided in section 181 of the CA to act in good faith in the best interest of the company and fit for proper purpose. In this scenario Paul acted in the interest of Cleo and not in the interest of the company as Paul was not eligible for handling the affairs of the business.       

Conclusion:

Thus, in conclusion it can be stated that Paul had breached his duty according to the provisions of section 181 of the Corporations Act 2001 (Cth).

Reference: 

Olley v Marlborough Court [1949] 1 K.B. 532

L'Estrange v Graucob [1934] 2 KB 394

Corporations Act 2001(Cth)